Easing Middle East tensions, global stock markets surge across the board

As concerns about the Middle East conflict’s impact on the market eased, international oil prices saw a sharp reversal, shifting from a surge to a significant pullback. At the same time, global stock markets moved from the notable declines of the past few days to a conspicuous rally. For investors, buying on dips has become the market’s mainstream strategy. However, some analysts point out that how the Middle East situation will affect the market remains unclear, making it hard to expect a sustained, trend-driven rally.

Oil falls, stocks rise

According to a report by CCTV News, on the local time of the 9th, U.S. President Trump threatened that if Iran takes any action to block oil transportation through the Strait of Hormuz, the United States would hit it with a “20 times more猛烈” strike than before. Earlier that day, at a press conference, Trump said the war with Iran “will be over” “very soon.”

Trump’s remarks prompted international oil prices to fall. International Brent crude oil prices dropped 10.22% on the day, to $88.85 per barrel. U.S. WTI crude oil prices fell 10.13%, to $85.17 per barrel. Previously, international oil prices had broken through $100 per barrel on Monday, and at one point even neared $120 per barrel.

The sharp swings in oil prices also spilled over into other assets. In the stock market, risk appetite saw a rapid rebound. In the U.S., the three major indexes rallied late on Monday; the Nasdaq rose 1.38%, essentially recouping losses since the onset of the conflict.

Asia-Pacific stock markets also rose across the board. Among them, Japan’s Nikkei 225 rose more than 3%, South Korea’s composite index rose more than 4%; during the day it once hit 5%, triggering a circuit breaker; SK hynix rose more than 10%. In China’s A-share market, major indexes turned positive; across the entire market, more than 4,300 stocks advanced, and the Shanghai Composite Index regained 4,100 points. The Hang Seng Index in Hong Kong opened up 1.31%, the Hang Seng Tech Index rose 2%, and popular tech stocks generally surged higher.

A research report from China Citic Securities (601066) said that this Middle East conflict has changed the global recovery trade since the start of the year. The surge in oil prices reshaped the global liquidity main theme, effectively driving the repricing of nearly all assets. When the conflict between the U.S. and Iran began, capital markets entered a risk-hedging pricing mode. As uncertainty over disruptions in the Strait of Hormuz’s shipping increased, the risk-hedging mode gradually shifted toward a stagflation-oriented mode.

A YuanChuang Futures analyst said that after the outbreak of the Middle East conflict, the market’s core trading logic shifted toward concerns that inflation would rise and the economy would experience stagflation. As a result, risk-hedging sentiment warmed quickly, which put overall pressure on global risk assets. But compared with peripheral markets, China’s A-shares showed greater resilience, with a lower level of negative impact. As the conflict eased and oil prices fell back, it also helped A-shares restore risk appetite.

A Guoxin Securities report said that in the initial stage of an international localized war/conflict, equity assets were dragged down, while the U.S. dollar and commodities performed better. Since 2000, there have been 12 relatively typical instances of international localized geopolitical conflicts; in the early period of the event (within one week), global equity assets were generally dragged down in the short term.

Heavy risk of “wait-and-see” sentiment

Regarding other assets, the gold market staged a rare case of “risk hedging failure.” As oil prices fell sharply and market risk-hedging sentiment quickly cooled, gold prices came under pressure and moved lower on Monday. COMEX gold futures briefly dropped to $5,021 per ounce; as of now, they rebounded to $5,182 per ounce.

A market participant, in an analysis to Beijing Business Today, said that in this round of trading, gold’s financial attributes are outweighing its commodity attributes—high oil prices raised concerns in the market about the Federal Reserve further tightening, and rising interest rates are gold’s biggest pressure. This rare “in the same direction” relationship between oil prices and gold indicates the complexity of the market’s current pricing logic.

In the FX market, Asian currencies are getting a breathing space. A strategist at Oversea-Chinese Banking Corporation noted that the significant retreat in energy prices from high levels has substantially eased import-led inflation pressure on Asian economies, giving Asian currencies that had been hit a chance to rebound. The current softening of the U.S. dollar has restarted carry-trade activity in emerging markets, but the market still remains tense. However, the firm also warned that safety of navigation in the Strait of Hormuz has not fully returned to the normal track; before more clear signals of easing emerge, the FX market will remain highly sensitive.

Chen Yuheng, a senior investment advisor at Jufeng Investment Consulting, said: “The Middle East situation may ease and bring the market a phase of recovery. But trading volume is not increasing and may even decrease, highlighting that investment enthusiasm has not truly warmed up, and wait-and-see sentiment remains heavy. The reason is that, after all, the U.S.-Iran conflict has not ended, and there are still many uncertainties in the subsequent outlook, so funds are afraid to rush in blindly to position themselves.”

The above Guoxin Securities research report further analyzed that over a longer time horizon, the impact of international localized geopolitical conflicts on broad asset classes is actually limited. Taking the observation window from one week to one month after the event, equity assets often see a recovery—for example, the median gain in the S&P 500 over the range is 1.4%, with an 83% probability of rising. Emerging market stock markets also mostly rebound. Meanwhile, the dollar and commodities that performed relatively well in the initial stage of the conflict began to weaken; the probabilities of the dollar and crude oil rising are 33% and 42%, respectively.

Risks still exist

Behind this extreme market of sharp surges and sharp crashes, the debate in the market about geopolitical risk and supply-demand fundamentals has never stopped. As the U.S. side released clear signals of easing, speculative capital began to withdraw, and the geopolitical risk premium was instantly diluted.

In response to the prior uncontrolled surge in oil prices, on March 9 the Group of Seven (G7) issued a statement saying that all parties are ready to take necessary measures, including supporting global energy supply through releasing reserves. On the same day, U.S. Energy Secretary Wright said the U.S. government is “discussing” coordinating the release of strategic petroleum reserves to deal with the current situation in the energy market.

In fact, even at the very beginning of the outbreak of this round of conflict, multiple international investment banks and energy research institutions repeatedly emphasized that although short-term sentiment may push up oil prices, the macro fundamentals of abundant global crude oil supply have not changed, and the geopolitical support for oil prices has an inherent fragility.

In a research note, Shenwan International Futures analyzed that current market factors of both bulls and bears are tightly intertwined, with the geopolitical conflict premium being rapidly given back. However, structural risks still remain. The conflict’s potential threats to key shipping lanes continue to support shipping costs, and higher rates on European routes confirm concerns about the supply chain.

A research report from Hualong Securities also pointed out that currently the geopolitical conflict has not shown obvious easing and may still cause phase-specific disruptions to global markets. But in the domestic market, due to valuations being generally reasonable, expectations for fundamentals remaining stable, and liquidity being ample, it is expected to continue maintaining resilience.

Finance commentator Guo Shiliang believes that whether oil prices have topped depends primarily on whether the Middle East geopolitical situation shows signs of a substantive easing. From a technical perspective, when the price shows a clear adjustment pattern after being at high levels and there is intense volatility at the top, it is often a signal of a top in the short to medium term. If the Middle East geopolitical situation is substantively eased and the Strait of Hormuz resumes opening, then the medium-term top for international oil prices would basically be confirmed, and the likelihood of oil prices entering a medium-term adjustment would rise significantly.